How to Avoid IR35 As A Hiring Manager
Hiring Managers: the rules around hiring contractors are changing.
You are now responsible for determining their status inside or outside of IR35 and paying any fees necessary. Failure to do so may result in some nasty intervention from HMRC and a hefty tax bill.
Sounds bad, right? Well, it’s definitely not good. What’s important to remember that it isn’t illegal to be inside IR35 and, for some contractor/client relationships, being inside IR35 might be a necessity.
But if it’s imperative that you avoid IR35 at any cost – take note of these tips:
Know Your Determinations
There is no occupation that would be automatically outside IR35. It all comes down to the terms and conditions of your relationship with the client or your working practices.
HMRC’s determination of a contractor relies heavily on a number of different ‘signals’ which may mean different things to different companies:
- Control – Does the contractor have control of how he carries out his work? As a client, you’d want to prove that you don’t have direct control over how the contractor meets the agreed deliverables of the project. Easy for IT contracting, less so for Construction, where management may be essential.
- Access – Does the contractor work on-site? Does the contractor use company tools like a laptop or a power drill? If a contractor is using all of your tools and has access to all of your facilities, the contractor may fail their IR35 inquiry because their access is indistinguishable from that of a full-time employee.
- Payment – Is the contractor receiving a day rate? Or by the job? The more regular it is, the closer a contractor is to an employer-employee relationship.
- Work Perks – Does the contractor go to all your parties? Do they receive staff perks? Sounds silly but it’s these fine margins that can make or break an investigation.
- Exclusivity – Does the contractor only work for you? Or do they have a long list of clients they’re contracting with? If they’re exclusive to you, you’re going to have a harder time explaining why they aren’t full-time staff.
Knowing the determination of your contractors and exactly who would be falling inside or outside of IR35 is a massive step towards preparedness and will help massively with the next step…
IR35 compliance for hiring managers is a lot different than it is for contractors.
Knowing the determination of any one of your contractors will be the difference between
There are a few things you can do to avoid arousing the suspicions of HMRC:
- No late tax returns: Submitting a tax return late – or with errors – will put you on HMRC’s radar, and arouse an inspector’s suspicions that you may be making further mistakes.
- Poor Record Keeping: Make sure to keep a ‘contractor diary’ that records all communication with the contractor. Emails, phone calls and more should be recorded to build out a narrative of what the day to day for that contractor looks like.
There aren’t any guidelines for what this relationship should look like but, as long as you can prove that they aren’t hitting any of the signals above, this will benefit your case massively.
Don’t Cancel Your Contracts
For some hiring managers, with very tight budgets for their contractors and not much time to properly assess the status of them, the prospect of an investigation (and a hefty tax bill) is a very real prospect.
Add to this the surreal level of scaremongering that is currently taking place and you’ve got yourself a recipe for panic.
As a result, the ‘let’s just stop using contractors’ option may look like the more attractive option, and it’s certainly been the option taken by a few agencies in the past.
But ask yourself: is that really the best thing to do?
Other than the fact that Contractors are a vital component of the UK workforce, ending all of your contractor’s contracts prematurely may land you in some serious trouble.
Pay for a contract review
You’d be hard-pressed to find an IR35proof contract.
That’s down to the fact that the difference between being inside and outside IR35 can sometimes come down to something as small as semantics.
That’s right. Any badly worded clauses in the contract might put HMRC right on your case.
For that reason, it’s imperative that you draft in the experts to have a look over your contracts to ensure they’re as watertight as can be.
Look for contracting solicitors who can review not just the contracts you open with contractors but also any ‘upper-level agreements’ you have with agencies.
Any discrepancies here will give HMRC another reason to question your determination.
Don’t put the name of the contractor in the contract
A quick fix here but one that will make a massive difference.
This one is all about first impressions. If an HMRC investigator was to comb through your contracts and find that
A contract is a legal document. It’s a general practice to keep these neutral and now it’s even more important to avoid that ‘disguised employee’ relationship.
Already, many recruitment agencies are building out their contractor insurance packages to include IR35 insurance which indemnifies everyone in the chain of a contractor’s employment.
In addition to this, the insurance also offers the following cover:
- Cover fines and legal penalties (up to £100,000)
- Covers any HMRC checks
- Ensures the fee-payer always has legal representation should they end up in an investigation
The only caveats here are that regular contract reviews have to be performed, which most recruitment agencies worth their salt will perform anyway.
Our own solution, VenturiOPRaaS includes bespoke insurance for IR35 as well as access to a tool that makes determining contractors easy.
- Don’t Replace an Employee with a Contractor
If you’ve just lost a permanent employee and are considering hiring a contractor to replace them, you will want to reconsider with the coming IR35 changes.
With the relationship between the end-user and the contractor being looked at heavily, it’s up to you to prove beyond reasonable doubt that the relationship you have with them is purely transactional and nothing like it would be with a full-time employee.
And replacing what was traditionally a full-time role with a contractor would seem… suspicious.
In some cases, this might be unavoidable, and as we mentioned above that isn’t something that should scare you if you plan well in advance.
Where possible though, just keep the boundaries between contractor work and full-time employee work black and white.
Keep the contractor at arm’s length
If an IR35 investigation was to be triggered, HMRC will be investigating the true relationship between you, the end-user, and your contractor.
They’ll look at a lot of things including how a contractor is engrained into your business. If you want to learn more, we’ve got a full list available to download here.
But, to avoid an IR35 investigation altogether, a good rule of thumb is to just keep your contractors at arm’s length.
Here are a few common ways that companies tread the line between contractor and ‘disguised employee’:
You Pay For Training
For some contracting positions, training is essential. Like AML training for contracting with banks. But where you can, you should try and avoid building in training courses and onboarding schemes.
For the necessary training, it may be a case of informing the contractor that they might have to conduct the training at a cost to them as to pay for the training would expose them to IR35 investigation.
IR35 will be a good opportunity for you to assess general onboarding best practices for contractors. Are there needless steps in the pipeline that you can strip out to make both the contractor’s and HMRC’s time with you a lot easier.
- Contractors are invited to work social events
This one makes hiring managers sound like a complete bore, but, it is honestly something that HMRC will look at when they’re trying to paint an overall picture of what your relationship is with the contractor.
So, recall those invitations for the Christmas party unless you want HMRC to come too.
What if your contractor is still flagged as inside IR35 and called for investigation?
Many contractors think their choices are only to find work outside IR35 or become an employee, but this isn’t the case. There are actually three options open to them when assignments fall inside IR35.
Take on ‘deemed employment’
The contractor can actually keep working through their PSC, but they need to class the work as ‘deemed employment’ and ensure taxes are being deducted at source by the Fee Payer.
Encourage the Contractor to work through an Umbrella Company
Contractors can work through an umbrella company, instead of their PSC. The umbrella company will send invoices and take on responsibility for paying PAYE and National Insurance.
Offer your contractor a contract of employment
There is, of course, always the option to work directly for the company under a contract of employment.
It is up to the contractor what solution they accept.